Madoff tied to Dallas County gas leases, trustee says

Dinner at the Steak Knife, a New Orleans favorite, ran $635.58,
including a $100 tip. But that was small change compared with what
the four diners stood to make from the plan they launched that warm
April night in 2007.

Natural gas prices were soaring; so were the prices for drilling
rights. The strategy cooked up over dinner near Lake Pontchartrain
was like many a boom-time enterprise: Lease Dallas County gas
rights with New York capital and flip the leases at a profit.

Yet this deal, a federal trustee asserts, included a secret
player: Bernard L. Madoff, king of thieves.

Madoff's sons and niece, who formed the energy company that
funded the Dallas County enterprise, have denied any
wrongdoing.

The resulting leases were legitimate, court records and
interviews indicate. Landowners got their money, either from the
Madoff venture or from a big producer that later bought the leases.
Few wells ever materialized because of a gas price crash in
mid-2008.

"I was pretty well pleased with what we got," said Jerrell A.
Holveck, who signed a lease in September 2007 with Conglomerate Gas
Resources LLC, a Madoff family company. "It's like money falling
out of the sky."

The venture's financing, however, got the attention of Picard, a
New York lawyer hired by the federal Securities Investor Protection
Corp. to recover as much as possible of the $20 billion or so that
Bernard Madoff lost or stole.

As his investigators scour the murky books of the now-closed
Bernard L. Madoff Investment Securities (BLMIS), Picard is suing
Madoff family members and their businesses that he says received
nearly $200 million diverted from clients' accounts.

Among Picard's targets are Madoff Energy, related companies and
the kin themselves. He is demanding nearly $5.2 million back from
the Madoffs for the Dallas County deal and much more for other
family enterprises.

Picard is not asking for anything back from dozens of Dallas
County landowners - elderly descendants of pioneers, family trusts,
investors, the Salvation Army, the Boy Scouts - who received lease
payments in 2007 and 2008. Nor is he or anyone else alleging any
wrongdoing by other people or businesses that took part in the
venture.

What did the family know?

In previous court filings, Madoff's sons, Mark, 46, and Andrew,
44, and his niece, Shana Madoff, 39, daughter of Bernard's brother
Peter, denied taking any unearned money from Madoff Securities,
where they worked for years as senior executives.

They have not replied to the Madoff Energy suit. Their attorneys
did not respond to requests for interviews or comments.

Mark and Andrew Madoff noted in earlier court filings that they
turned in their father after he confessed his Ponzi scheme to them
on Dec. 10, 2008. Arrested the next day, Bernard later pleaded
guilty to federal charges. Now 72, he has 149 years left on his
150-year prison sentence.

"Their revelation of their father's crimes led to the collapse
of the profitable - and concededly legitimate - market-making and
trading businesses that they had spent their professional lives
building," the sons' attorneys wrote earlier this year.

"For this, among many other reasons, they rank among the
numerous victims of their father's terrible crimes."

"They either knew of the fraud or intentionally shut their eyes
to it," he says in his Madoff Energy suit.

Clients' money, Picard says, propped up Madoff family
businesses, such as Madoff Energy - "another instance in which
Madoff fraudulently transferred millions of dollars of BLMIS
customer money to fund his family's personal business investments,
this time in oil and gas properties."

Picard says the clients' money - diverted to the family as
unearned employment bonuses, unrepaid loans, fictitious stock
purchases or outright transfers without even a cover story - also
paid for the family's vacation homes, cars, boats, clothes, jewels,
even their monthly credit card bills.

Madoff Securities, Picard asserts, "was operated as if it were
the family piggy bank."

Meanwhile, the clients - banks and investment funds, movie
producers Steven Spielberg and Jeffrey Katzenberg, sports team
owners and other wealthy people - lost money. Some retirees of
relatively modest means lost all they had.

Victims also included schools and charities, such as the Elie
Wiesel Foundation for Humanity. The organization, founded by the
Holocaust survivor and Nobel Peace Prize recipient, said in late
2008 that it had $15.2 million with Madoff, "substantially all of
the foundation's assets." A year later, the foundation said it was
able to stay in business thanks to gifts "from $5 and up."

On its face, the Dallas County venture looked like many others
in the Barnett Shale, the nation's biggest gas field, where
companies have drilled an estimated 17,000 wells since 2005.

The party obtaining a gas lease from a mineral rights owner
might be just a middleman, hoping to resell the lease to a
production company.

Such a venture requires capital to pay landowners their one-time
bonuses or upfront fees. It's common for local agents or
entrepreneurs to recruit investors.

Southern Methodist University law professor John Lowe, an expert
on mineral rights, said that while the standard lease in Texas has
been nearly perfected over decades, having a knowledgeable lawyer
read one first is on any careful landowner's checklist.

"That, and get the money as quickly as possible," Lowe
added.

Boom in bonuses

During the gas price spiral of 2005-2008, per acre bonuses in
the heart of the Barnett Shale, west of Dallas County, started at
$500 and soared to $25,000. Bonuses have dropped since, along with
gas prices.

Bonuses never got that high in Dallas County.

"It was what we would call very risky, fringe production
potential," said Ken Morgan, director of the Energy Institute at
Texas Christian University.

"Anybody going into that would have to appreciate the risks. The
bonuses would be much smaller."

So in early 2007, with natural gas prices breaking records
nearly every month, it seemed possible to obtain Dallas County
leases cheap and sell them higher as prices rose.

That was apparently the plan for Conglomerate Gas II, one of
several limited partnerships set up by Fort Worth businessman D.
Alan Meeker.

Meeker did not respond to requests for comment or an
interview.

The Crosbie saga

Raising capital to obtain local leases hadn't always been easy.
In September 2005, Conglomerate Gas II planned to borrow $125
million from a Houston woman, Meryl G. Crosbie, Meeker's company
said in a subsequent lawsuit.

It didn't work out. Crosbie, apparently unknown to Conglomerate
Gas II or the law firm the company hired to seal the deal, had
filed for bankruptcy three months earlier. Instead of $125 million,
Crosbie told the bankruptcy court she had her heavily mortgaged
house, two aging cars, clothes, jewelry worth $250 and two bank
accounts with $50 each.

There was more. In 2004, Monumental Life Insurance Co. of
Baltimore had sued Crosbie, an independent agent, accusing her of
pocketing $1.8 million in fraudulent commissions by writing 624
bogus policies on herself, people she knew, people she didn't - and
115 who were dead.

Crosbie settled with Monumental for $1.4 million in February
2005 but didn't pay. She was arrested in May 2006, pleaded guilty
to felony theft five months later and was sentenced to 10 years in
prison. She served two years before being paroled.

Court records don't say how a bankrupt felon became a supposed
$125 million bankroll for Dallas County leases. Crosbie, 53, could
not be reached for comment.

At any rate, by early 2007, court pleadings say, Conglomerate
Gas II was seeking a different backer.

To find it, Meeker turned to Big Easy Energy LLC, a small New
Orleans company run by investment bankers. Scott J. Brown, one of
its principals, declined to comment but described what happened
next in court filings.

Brown told Meeker he knew of a potential investor: Madoff Energy
of New York.

Mark, Andrew, and Shana Madoff had registered Madoff Energy LLC
in Delaware six weeks earlier, giving it the same Manhattan address
as that of Bernard L. Madoff Investment Securities.

Madoff Securities, Picard says, paid Madoff Energy's start-up
legal costs: $25,010.42 on March 16, 2007, to the Gardere Wynne
Sewell law firm. The trustee calls that an improper use of clients'
money for family expenses.

At the Steak Knife

Brown set up a meeting at the Steak Knife, a steak and seafood
place in New Orleans' Lakeview neighborhood. Gathering for dinner
the evening of April 4, 2007, were Meeker; Brown; Craig Dermody,
another principal in Big Easy Energy; and Greg Imbruce, an
investment adviser representing Madoff Energy.

By the time dinner ended, the deal was more or less in place.
Meeker's company would obtain leases in Dallas County and flip
them.

Imbruce would present the offer to finance the measure to Madoff
Energy.

For arranging dinner and the deal, Brown's firm would get a
percentage of Conglomerate Gas II's profit from the venture. He
paid the check with his American Express card.

Two months later, on June 4, Meeker and Mark Madoff signed a
document laying out terms of the deal. By late summer and early
fall, the first leases were signed and recorded in the Dallas
County Courthouse.

Through summer 2008, about two dozen Dallas County landowners
signed.

The strategy seemed to work. By July 2008, natural gas reached a
record $11.32 per 1,000 cubic feet, nearly double the 2007
average.

Court filings do not list the total profit for all participants,
but they do specify Conglomerate Gas II's share: more than $3.34
million.

Fraud or hard work?

Much was also happening in New York. On May 31, 2007, Mark,
Andrew, and Shana Madoff formed Madoff Energy Holdings LLC and
Conglomerate Gas Resources LLC, the latter nearly identical in name
to Meeker's Conglomerate Gas.

Madoff Energy Holdings became the parent firm for all the family
energy companies. All were listed at the same address as Madoff
Securities.

During the same period, millions of dollars were fleeing Madoff
Securities and ending up in the energy ventures, the trustee
alleges.

Mark and Andrew Madoff each received $5 million in "illegitimate
and fraudulent" bonuses from Madoff Securities between February and
July 2007 and used that money to fund their shares of Madoff
Energy, Picard says.

Madoff Securities transferred $1.7 million directly to Madoff
Energy Holdings in June and July 2007 to fund Shana Madoff's share
in the venture, according to Picard.

Those payments were "taken from various BLMIS operating accounts
and recorded as a purported draw against her father, Peter
Madoff's, compensation," he contends.

In replies to other lawsuits, the Madoffs said they worked hard
and honestly for their money. They noted that they worked in
legitimate Madoff Securities operations and said they had no
oversight duties for the investment-advising division where Bernard
Madoff ran his pyramid scheme.

Rather than the "astronomical compensation" that Picard
describes, the Madoffs say they received normal and expected pay
for executives at a big financial house. They say the collapse of
Madoff Securities wiped out their own investment accounts at the
firm.

Picard's Madoff Energy suit has no trial date. A preliminary
conference before U.S. Bankruptcy Judge Burton R. Lifland,
rescheduled twice, is set for Nov. 30 in New York.

Meanwhile, economics dictated at least a pause in Madoff
Energy's Dallas County venture months before the family patriarch's
arrest. After the July 2008 pinnacle, gas prices dropped off a
cliff, wiping out six years of gains in months.

Texas corporate records still list Madoff Energy Holdings and
four other Madoff family energy companies as active in Texas.

But the gas business is slow. The last action on any
Madoff-related leases was a sale to Chesapeake on June 17, 2008,
Dallas County records show.

Producers have drilled some wells in southwestern Dallas County
just to keep three-year leases current - "more, probably, than the
economy would justify," said Lowe, the SMU law professor.

The rights owners

That might be what happened on Joleen Rampy's land, which she
leased to Conglomerate Gas Resources in late 2007. The company paid
the bonus quickly and then sold the lease to Chesapeake
Exploration, which has drilled one well and has four more ready to
drill, Rampy said.

"We had no problem," she said. Royalty checks are flowing into
her mailbox.

No royalties are coming to Jerrell Holveck, who signed a lease
with Conglomerate Gas Resources but got his bonus check from
Chesapeake. The big producer never drilled anything, and the lease
expired.

"I'd be open to negotiating a lease again," Holveck said. "I
just hope someday that somebody will see my name and phone number
and call me.

"They invested lots of money in that area not to follow through
on it."

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